I have heard some people make claims almost somewhat similar to that. Mark Meldrum did say that technical analysis can be very useful sometimes (although he did remark that a contributor to the technical analysis section of an old CFA Level 1 curriculum ought to be stripped of his CFA title for making grand claims about its usefulness). I will appreciate thoughts on this.
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Well it certainly isn't a science lol
At least the idea of support and resistance levels has some real marked psychology.
Technical analysis works if people believe technical analysis will work.
This is wrong. In fact, the complete opposite is true.
TA doesn't work because, TA works. Paradox? Conundrum? TA won't work because people think TA works.
Explanation:
TA won't work when the market is weak-form efficient or above. Guess what makes the market weak-form efficient? When people think TA works, so they all use TA which crowds out/ competes out all the gains, so there's no gains left.
This is a spin on the Grossman-Stiglitz paradox. Aswath has also said that in his view, markets go thru CYCLES of efficiency as people cycle thru bouts of thinking markets are efficient/ inefficient, which incentivizes them to do active management/ research or not. I agree with this view completely, and I thought of it even before I read about Grossman-Stiglitz
Finance is beautiful, really. It's in this field where complete whacko truths/ observations hold - smtg doesn't work because it works
If we define technical analysis as any decision making not based on fundamentals, then there are still stat arbs between products/derivatives and predictive information from order flow. Most people call that quant trading rather than TA. The typical retail trader making patterns out of candlestick charts is all complete BS though. Might as well listen to them talk about their roulette strategy.
This is going to be a long answer.
Sort of, there's no "magical indicator" or pattern that's going to make you rich by itself. That's all bullshit. As others have stated, what makes technical analysis work is human psychology and belief/conviction.
Support and resistance work because certain emotions at certain levels create a self-fulfilling prophecy. Like, let's say there's a certain resistance level at $5 with a lot of volume and then the stock drops to $3. That creates a lot of "bagholders" that are now down $2 on their position. When the stock returns to $5, many sellers will be desperate to break even and sell at $5. Additionally, short sellers are going to anticipate that and create even further resistance. Longs that bought under $5 are going to anticipate that as well and look to take profits around $5. It's not so much that there's something special about $5. It's that humans are emotional, and they make emotional decisions that you can predict and make decisions around.
Support and resistance can also tell you where supply and demand are. If you know how to read the chart, you can see where institutions are buying and selling, and you can ride the waves they make in the market. Institutions can also hunt for liquidity around certain levels of support and resistance.
Also, people tend to gravitate to nice-looking whole half-dollar numbers like $1.50, $5, $10, etc. Just like $1.99 feels better than $2.00. That's called charm pricing.
Additionally, almost any stock with a lot of volume will set off a whole bunch of bullshit indicators and patterns. You'll have all those bull flags, opening range breakouts, moving average cross-overs, VWAP, head and shoulders, red to green, or whatever. That's when you'll see all these gurus making videos saying, "See, the magical pattern works!"
First, those are all lagging indicators. It's easy to see where you should have bought the next day, like a Monday morning quarterback. It means nothing. But the second thing is, it's whatever you need to give you the confidence to hit buy, stay in the trade, and exit when it's time to get out of the trade. Some people need to see that bull flag to hit the buy button, even though there's nothing special about it. There's no edge to it by itself, and you'll lose as much money as you make buying those patterns over a long time period.
However, there's also an intuition that traders develop after studying so many charts over a long time period. They have their finger on the pulse of the market and can anticipate price action in ways that are difficult to communicate to other people. You can't convince an investor to fund you by saying that you just know, but they do just "know." It's like how anyone that's mastered their craft knows. Brady knows the defense just like Buffett knows annual reports, and Curry knows the three-point line. It's something you can't really teach or test. That's when traders start saying there's an art to it, and it sounds like bullshit to a quant or an investor. You can't teach a computer how to do that yet. You can combine that intuition with some of those patterns to make money. But then it becomes more about the skill of the trader than the actual pattern. That's why you can't teach a trading or investment strategy. Warren Buffett has been saying the same shit for decades, but there's only one Warren Buffett.
Every trader and investor is trying to generate alpha, but not everyone can do it even though everyone has read the same books and studied the same information.
There's a Japanese trader named BNF that I just learned about the other day who turned $13,000 he saved up into $150 million dollars in 8 years using moving averages. I believe he could have taken those same trades without the moving averages, but as I said, people need certain indicators that make sense to them that give them the conviction to execute a trade. This is an interesting and entertaining video on his life that you might like (it's about 30min long).
Some investors also combine fundamental analysis with technical analysis, like Paul Tudor Jones. He was quoted as saying, "fundamentals are for finding the best stocks, but technicals are for finding the best time to buy or sell those stocks."
Even if some people think technical analysis is complete bullshit, there are people using it to make fortunes. At the end of the day, there are many ways to make money in the markets, and as long as something makes sense to you and you're making money, then no one can tell you shit.
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